02/17/10 Gaithersburg, Maryland — "All life is a process of breaking down," the great F. Scott Fitzgerald once wrote. "But the blows that do the dramatic side of the work...don't show their effect all at once." These other blows you don't feel until it is too late to do anything. Fitzgerald was writing about his own famous crackup in the 1930s, but his comments also apply to the agricultural scene circa 2010.We return to a theme in last month's letter. The world will need to boost its production of food. The UN estimates that the world will need to boost investment in agriculture by $83 billion a year — that's a 50% annual increase — to feed a growing population. Its estimate may prove an errant shot from an uncertain bow into an unpredictable future. But it doesn't matter. Investing is more like horseshoes and hand grenades, as the old saying goes — close counts.If the UN is half right — others have done similar work with similar conclusions — then we're talking about a healthy bull market in all things green. The question is where does the boost in production largely come from? The answer is Brazil [and Russia], as we discussed last month. We'll explore the idea a little further here from a different angle.

In my last letter, I noted how lack of electricity in India leads people to heat their homes and cook with dung cakes, crop residue and firewood. Why is this a bad thing?

Because the soil needs that precious manure and crop residue. It nourishes the soil and allows it to hold water. Without this natural replenishment, the soil deteriorates. It compacts and turns to dust. When the next monsoon season rolls around, it washes away. And the burning of firewood, on such a scale as the Indian population requires, leads to the disappearance of forests. A similar cycle ensues.This is the "topsoil crisis" that we first talked about more than a year ago.The world continues to deplete its base of arable land.Though it's been going on for some time, the dramatic blows are only now showing their effect.In East and North Africa, in the plains of India all the way to Turkey, the story is the same. Some of it is just human carelessness about the land. Some of it is climate driven: the declining snow melts of the Himalayas and more frequent crop-killing heat waves in places such as India.

Climate change has been going on for a long time, too. As Peter Matthiessen points out in The Snow Leopard, the Gobi Desert was once fertile. In Central Asia, he writes, "broad lakes vanished in dry pans and grasslands turned into shifting sands." Many of these changes happened in only a few hundred years. "The death of a civilization can come quickly; the change in climate that dried up rivers and destroyed the savannas of the central Sahara scattered the great pastoral civilizations of [Africa] in just a few centuries after 2500 B.C."Such changes impact economics as well. Already, we are close to passing some giant milestones of our own. China, you may recall, is now the largest net importer of soybeans in the world. A mere 15 years ago, it made more than it needed and exported soybeans. Now India may import rice. Some think that India could import as much as 2 million metric tons, the most in the world. Traditionally, India has been the world's third largest exporter. (It's already banned overseas rice sales in an effort to keep rice at home.)

The Philippines, thanks to typhoon damage, will also be a net buyer of rice this year.South America will produce less, and there is potential trouble with the crop in the Mississippi Delta. Yes, Thailand and Vietnam appear to have healthy rice supplies. But it won't be enough.

All of this puts Brazil in the catbird seat, as more people are starting to figure out. "Superpower Is Ready to Feed the World," reads a Financial Times headline [Russia could also fit that headline]. You may quibble with the FT's exuberant labeling of Brazil as a superpower. But Brazil is now the top exporter of chicken and beef, orange juice, green coffee, sugar, ethanol, tobacco and the soya complex of beans, meal and oil. It is No. 4 in maize and pork. It is, agriculturally speaking, deserving of the superpower label.However, expansion is not so easy, and here lies the treasure for investors. As the FT reports: "In Brazil, analysts say [that] output is reaching its limit and the investment needed for growth, especially in transport infrastructure, is falling short." This jibes with the UN's report I mentioned above.

On-the-ground reports from farmers in Brazil add further confirmation and make the hurdles clear. There is a lack of rail and water transport infrastructure. As author and traveler Roy Nash wrote in 1926 — and it is still true today — "Space is Brazil's pride. Space is equally Brazil's weakness."Most of those crops must make a tortuous 2,000-kilometer trek over bad roads to congested ports. (Brazil has the world's third largest road network, but only 12% is paved.) The cost of transportation is often north of a $100 a tonne, more than three times what farmers pay in the US to bring their goods to market....

... Roberto Rodrigues, an agribusiness consultant and former Brazilian ag minister, says: "If I were an investor, I would put my money in logistics and fertilizer. The opportunities are fantastic."

We are amply represented here with our fertilizer stocks, though only one remains close to my buy price as I write: Mosaic (NYSE:MOS). This one is particularly fitting for the Brazil angle because it is the world's largest producer of phosphate, of which Brazil is in particular need. Mosaic has phosphate plants in Florida, in places such as Riverview and Hopewell and Wingate. It ships these to Brazil, where it has seven warehouses and blenders and two production facilities. It also has a major office in Brazil — in Săo Paulo.Unlike the crackup Fitzgerald describes, it's not too late for agriculture to do anything about its long process of breaking down. Prices of grains and agricultural commodities will rise to attract the needed investment. That wil
l be good especially for the fertilizer companies, who sell a product needed to replenish the world's tired soils.

Is it just me or is there a subtle change of "vibe" going on? Spring is finally just about here it seems after a very long wait. The warmest day of the year so far is expected across some parts of the UK today, according to Metcheck. "We are looking for somewhere like the North Norfolk Coast to record the day's high - around 17C (63F)," they say.Easter is only a couple of weeks away, which usually means it's turnout time. Yipee, get the buckets and spades out #3, and find me my skin tight lycra posing pouch. Feed demand will fall off a cliff, Ensus will be churning out more DDGS that they know what to do with, our UK wheat stocks will become even more burdensome than they already are. You won't be able to give stuff away, that much is obvious to a blind man.So obvious in fact that just about every compounder in the country seems to have organised his book so that he doesn't get caught out this year, no Siree. There's massive record crops on the way from South America, haven't you heard? Ensus, did I mention them? They'll be desperate, they won't be able to give the stuff away apparently.

Them naughty lads the shippers are in for a right royal spanking this summer, they'll have so much stuff round their necks that they can't get shot of. All you have to do is sit and wait for them to come begging at your door, tee hee. Bring it on, bargains aplenty. Discounts R Us. Lordy, lordy don't you just love it when those bad lads take a pasting.

Unless...[is Nogger coming around to the dark side?]They don't bring it in in the first place, hardly cricket old boy I'll grant you, but it's an option. Surely they know that the compounders are going to want it really? Surely they're going to have sheds full of unsold expensive raw materials just waiting for the buying orders to come flooding in?

What, they're not? Bugger.One shipper told me yesterday that they had a boat waiting to load in Brazil that had been there for 2 1/2 weeks, and they weren't expecting it to sail for another 10 days yet. Bugger. Many boats are also now being chartered to load part of their cargo in Argentina, and part in Brazil. If they don't get delayed in one, they'll get delayed in the other. Unless they get delayed in both of course. Bugger.A glance down a random shipper's soya price list yesterday shows mid April hipro priced a tenner blow early April, May 1st priced a further twelve quid below that, mid May a further six quid cheaper and June/Oct fifteen notes cheaper still.[Backwardation - spot prices are higher than forward prices - is a sign of shortages to come.]A different one today, asa April twenty quid cheaper than asa March, with asa May a further THIRTY quid less and asa June fifteen quid less again. A sixty five pound price differential between asa March and asa June,three months.

You'd have to be criminally insane to be shipping large quantities of unsold raw materials in on the off chance that a buyer might pop up, given rapid and substantial price differences like that [Brazilian/Argentinean exporters have already sold the "expected record harvest" and are waiting for the "cheap" soybeans they are expecting to come]. So you ship the bare minimum to cover your existing sales. In fact you ship less than the bare minimum and hope to "wing it" and be able to get away with it, replacing with cheaper soya later on. Surely they aren't ALL going to want it in the first half are they? Guess what, not only does everybody want it first half, they all want to buy more on the spot market when we get there as well. Bugger.

Not only have you not got enough to fulfil existing sales, but you're having to turn away sexy little spot orders because you're already oversold anyway. Double bugger. If you really get caught then you're going to have to go cap in hand to another shipper and buy some spot off him. If he's got it, and isn't playing the same game as you. And if he's willing to sell it to you at all of course.

Imagine this scenario, Ensus run at only 50% capacity whilst they make tweaks to the production process. Those tweaks take longer than anticipated, most of the summer in fact. Bugger. They've got existing winter sales carried over that they still have to fulfil out of this reduced tonnage, leaving them not the distressed seller you thought. Bugger. Cargill have a summer shutdown. ADM have a breakdown and/or you find have suddenly sold all their stuff for export to Ireland because you told them you didn't want it. Nobody has shipped imported rapemeal in because it was folly as those two were offering rape out at more or less the same price as it's quoted at on the Continent. If you want a load to go to Scotland you have to road it up from Teignmouth as that's where the only spot stuff is in the entire country. Petrol prices hit a record high. Everyone's a spot buyer, compounders, merchants and even the shippers themselves. Bugger, bugger, bugger.

Australian export figures reveal that more than 400,000 MT of wheat has been shipped to China since the start of their marketing year in November. That's the highest level of sales in at least the past five years.

Yet officially China has huge wheat stocks of it's own, this wheat is simply being used to blend into what they already have, traders say.

Certainly whatever they have got in store has probably been there for some considerable time, several years probably.

Recent revelations from the USDA's attache in China that last season's crop was probably overstated to the tune of 8.5 MMT appear to have been largely ignored.They certainly were by the USDA themselves in the March 10 WASDE report, which left Chinese production last year unchanged at 114.5 MMT.

And if they're prepared to ignore 2009's overestimate then there's really no point rocking the boat and looking even further back than that is there?

India meanwhile, the world's second largest producer and consumer of wheat after China also conti
nue to send out confusing signals.

Talk of large scale exports to make room for this season's impending new crop have largely failed to materialise.They too are supposed to have huge government reserves, yet despite spiraling food price inflation the authorities have been extremely reticent to release these stocks onto the market at anything like a sensible price.

Today Indian ministers have agreed to extend a tax-free import window for wheat beyond the end of the month when it was due to expire.

Whilst they've also agreed to permit the export of 650,000 MT of "wheat products" at the kind of prices they've been asking of late they will be comfortable in the knowledge that they won't find many takers.

To sum it up, we have absolutely no idea really what stocks are being held by the two largest consumers of wheat in the world. Nor can we be sure what condition those stocks are in.

You probably don't need to be Poirot to figure out that they probably haven't got anything like the combined 77 MMT ending stocks that the USDA are predicting, that's 39% of all the wheat in the world incidentally. Neither do you require the services of David Suchet to guess that much of what they have got isn't fit for feeding to the cat.

My reaction: Judging from Nogger's recent post, things are starting to get a little interesting.

As can be seen in the chart below, March was the low in soybeans last year, and I expect the same to be true for this year.

3 Responses to The Topsoil Crisis

Suppose the free market, which includes speculators, allows for the possibility of speculators hoarding the entire food crop. Once they control it, even if they're not working in collusion, they can charge whatever price they want.

Just as the Russians hoard toilet paper, even if the country can produce enough toilet paper for "normal" usage, because people hoard it, enough isn't enough.

So you have a misallocation of resources. If you produce enough to satisfy the speculators who can drive up prices by their hoarding, you've wasted resources.

As an alternative, you break the backs of the speculators by selling short production that you don't have. That cripples their ability to raise enough money to finance control of an entire supply.

Knowing this, the speculators don't try to corner the entire market. Production is suitably low to balance out demand. Resources are not wasted in overproduction.

Even if all these massive shortages exist, is there a danger of starvation? Or is the real danger that market investors will invade the futures markets and lock up the supply, and that will cause food prices to skyrocket?

I don't know. I don't know. I just wish something would change. Eric if June comes around and it's business as usual I'll probably call it quits on your blog. I bet you've been checking your view stats and you've been noticing a trend down, in terms of popularity, eh? Just a guess on my part.

I'm reading conflicting reports about the state of coffee growing in South/Central America. Earlier on this blog I got the definite impression that coffee might be scarce so I started stocking up on it. Now I read that coffee production in a different country will be great. So which is it?

As for a general food crisis, that's iffy as well. As long as you have lots of local farmers markets, you don't have to worry. Plenty of fruits and vegetables to preserve and can. But I can't grow my own coffee....

I dunno. I'm a food seller (storable foods) and we're selling / shipping out a 100 tons a week right now. In other words, we are buried with orders. For a company like mine, this is Y2K fear all over again.

Either the world has gone insane and is running scared, or they're just hedging their bets or something else is going on??

I see this as a compounding problem with topsoil in critical supply, fertilizer / phosphates, droughts and glacial runoff accelerating, crop losses in hugely populated countries like China, India, export restrictions and controls, climate change affecting all kinds of production / results / expectations, and of course, market forces bearing on 'investors' trying to take advantage of the nervousness and fear.

It all adds up to a run on available supplies on a global scale and imo, can only worsen as the reality of climate and production makes itself known.